A Case on Restrictive Covenants

Employment Contracts often contain what are known as restrictive covenants.  Businesses seek to impose such restrictive covenants in order to try and prevent or limit a departing employee from doing such things as setting up in competition, working for a competitor, enticing away staff and soliciting customers and suppliers.

The restrictive covenant must be reasonable, in that it can only go so far as reasonably protecting a legitimate interest of the business and should not be used to stop departing members of staff from working.  As a result it is always important to get legal advice on such clauses, to try and ensure that they are reasonable or otherwise if they are found to be unreasonable then they will be void and have no effect whatsoever. 

An interesting case on restrictive covenants from the end of last year (2012) was Pat Systems –v- Neilly, which was determined by the High Court. 

Mr Neilly joined Pat Systems in 2000 as a junior salesman.  His original contract included a restrictive covenant stating that for twelve months after leaving the company he could not join a competitor.  In 2005 Mr Neilly was promoted to director of global accounts, a senior position.  Upon promotion he signed a letter that increased his salary and notice period.  The letter also included an acknowledgement that all other terms and conditions in his contract would remain unaltered.

In 2012 Mr Neilly resigned giving three months’ notice, and informed Pat Systems that he intended joining a company that Pat Systems regarded as a competitor. 

In response Pat Systems dismissed him without notice for a serious anticipatory breach of contract. 

The High Court considered that at the time Mr Neilly entered the contract in 2000 that it was quite clearly the case that the clause was void as it was unreasonable to impose a 12 month restriction on a junior salesman. 

However Pat Systems argued that the contract had been entered into in 2005 when Mr Neilly got promoted, upon the basis of his acknowledgement that all other terms remained unchanged. 

The High Court ruled that an acknowledgement was insufficient, and that Mr Neilly either needed to sign a new contract (including the covenant) or he needed to sign a fresh indication of acceptance of the existing covenant.

Daven Naghen, head of our Employment Team commented as follows:-

“This highlights the need for businesses to ensure that employees sign a new contract every time there is a change in role or a promotion.  Had Pat Systems done so in 2005 when Mr Neilly was promoted, then this probably would have prevented Mr Neilly from joining a competitor for 12 months as a 12 month restriction would probably have been deemed reasonable for the position he had acquired in 2005.”

If you need advice on restrictive covenants or any issues in respect of drafting contracts then please contact Daven Naghen on 01775 722261 or email daven.naghen@maplessolicitors.com or write to Dav at 23 New Road, Spalding, Lincolnshire PE11 1DH.